19 March 2020

Emerging Employee Benefit Issues during the C-19 Pandemic

In response to the C-19 pandemic, we are seeing an increasing number of employee benefit questions.  Many of those questions center on employees’ eligibility under employer-sponsored health and welfare benefit plans during furloughs, and ways that employers can provide financial assistance to employees using employee benefit programs.

Because of these questions, we will be touching on these issues in multiple webinars.  We will be providing some information in a webinar this Friday, March 20 that discusses issues surrounding temporary layoffs and shutdowns.  We will also be hosting a webinar next week where we dive into the issues previewed in this post in more detail. Here are the issues that we plan to address:

Health and Welfare Benefits

  • Are employees eligible to continue health and welfare benefits if they are furloughed, laid-off or placed on leave of absence? There is no universal answer to this question, but it likely depends on three issues: (1) an employer’s desire to continue health and welfare benefits during these periods; (2) how the employer classifies these employees during these periods; and (3) the eligibility terms under the employer’s health and welfare benefit plans.
  • Are employer-sponsored health plans required to provide coverage for the diagnosis (e.g., testing) and treatment of C-19? Generally, the answer is yes for fully insured group health plans issued in the individual and small group markets.  For other group health plans (fully insured plans issued in the large group market and self-funded plans), the answer depends on the plan’s terms.
  • May employer-sponsored health plans impose participant cost-sharing requirements on the diagnosis and treatment of C-19? Many states require fully insured plans to cover the diagnosis, but not the treatment of C-19, with no participant cost-sharing.  All health plans may soon be required to cover diagnosis under proposed federal legislation.
  • If we collect certain medical information from employees, does HIPAA apply to that information? Generally, no.  Medical information obtained directly from employees is generally not subject to HIPAA, but confidentiality requirements under other laws—such as the ADA—may apply.

Retirement and Executive Compensation

  • Are employees permitted to withdraw funds from their 401(k) or 403(b) account while still employed? Yes, in certain circumstances.  To the extent permitted under the employer’s Plan, participants may request a loan, an “in-service” distribution (if the employee is least age 59 ½), or a hardship distribution.  Each option is subject to different limitations, and different economic and tax consequences.  We expect to see expanded distribution options and tax relief in an upcoming stimulus bill.
  • Given the economic uncertainty, we are considering suspending or reducing employer contributions to our 401(k) or 403(b) Plan. Is this permitted?  The answer to this question depends on the type of contribution and the terms of the Plan.  Some employer contributions may be eliminated prospectively, such as discretionary matching contributions made on a payroll period basis.  But plan amendments and other requirements may apply, depending upon the circumstances and the employer’s Plan.  For example, mid-year changes to “safe harbor” matching contributions are subject to several employee notice requirements.
  • Our executives participate in a non-qualified deferred compensation program, and they may want to access their funds during an extended furlough. Conversely, if an executive’s employment is unexpectedly terminated, the executive may want to defer the distribution. Are these actions permitted?  Nonqualified deferred compensation plans are subject to complicated payment timing rules under Section 409A of the Code.  Except in limited circumstances, accelerating or delaying payment under these programs triggers expensive tax penalties.  However, distributions for “unforeseeable emergencies” are permitted under Section 409A, which may give employers some flexibility to allow employees to access limited amounts of deferred compensation during employment.  Employers must also be aware of the “separation from service” rules, which could potentially trigger distributions for participants on a long-term leave of absence.

Other Ways to Provide Assistance to Employees with Benefit Programs

  • Supplemental Unemployment Benefit Plans. Employers may be able to supplement state-paid unemployment benefits of employees who have been laid-off or terminated on a tax-favored basis.  As long as the receipt of benefits under these plans is linked to eligibility for state unemployment benefits, these payments are exempt from the employer and employee portions of payroll taxes (FICA and FUTA).
  • Donated PTO programs. Employers can allow employees to donate PTO to other employees on a tax-favored basis.  The value of the donated PTO is tax-free to the donating employee and is treated as taxable wages to the employee who receives the donated PTO when it is used.
  • Employee Emergency Assistance Funds. Employers that have established emergency assistance funds using a non-profit entity may be able to provide financial relief to employees on a tax-free basis.
  • Section 139 Disaster Relief Payments. Employers are permitted to make tax-free “disaster relief” payments to employees.  On March 13, 2020, the President declared COVID – 19 a “nationwide” national emergency under the Robert T. Stafford Disaster Relief and Emergency Assistance Act.  Under this declaration, COVID – 19 is a “qualified disaster” under Section 139 of the Internal Revenue Code.  And under Section 139, employers are permitted to make tax-free payments to employees to “reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster.”  Employees are not required to substantiate the expenses (e.g., provide receipts), but the reimbursements or payments must be reasonable relative to the anticipated expense.  Adopting a written program is recommended.

Please tune into the upcoming webinars if you would like more information, and please contact your Miller Johnson employee benefits attorney if you are considering implementing any of these benefits.